Make no bones about it; buying a
business is a big deal. Depending on whether you buy all or part of
a business, your investment will likely result in the largest single
asset you ever own.
Don't be careless or naive. Don't
rely on someone's word alone to verify the condition of the
business. Don't move forward without the sound advice of legal and
tax counsel. Yes, there are a lot of don'ts. But what should you do?
Here's a list of steps you can
take (not necessarily in order of execution) to make sure you get
educated . . . and protected:
-
Ask lots of questions. In
particular, get information about the finances, marketing,
ownership and operations of the business.
-
Be sure that buying the
business fits into your life plan. Is this really the time for
you to dive into entrepreneurship?
-
Clarify with the seller why he
or she wants to sell the business. Is he or she facing a
lifestyle change? Does the owner recognize that the business can
grow more from others' greater expertise? Or is the owner
dumping a dog?
-
Do your due diligence. Look at
corporate records and tax returns. Speak with company employees.
-
Evaluate the condition of
business assets, such as machinery, equipment and computers.
-
Focus on the financial
condition of the company as well as the state of the industry.
Is there positive cash flow? How does the balance sheet look?
-
Get in touch with a banker to
determine your financing options as early in the process as
possible.
-
Have an advisory team in
place: There's no need to take such an important step as buying
a business while groping in the dark.
-
Investigate whether there are
any outstanding lawsuits, judgments or criminal complaints
against the company or any of its employees.
-
Judge whether the physical
work environment is well-kept or if it contains hazards.
-
Kill the deal if you receive
strong resistance to your reasonable requests for disclosure.
-
Listen to the employees to
gauge their awareness of the sale and their feelings about the
potential transition.
-
Make a note of any significant
turnover of employees.
-
Nail down a reasonable
valuation of the business.
-
Open discussions with the
seller about whether he or she would be willing to stay on in a
transitional capacity. Also, consult with your advisors to
determine whether that's wise under the circumstances.
-
Paper the deal. Whatever
arrangement you reach, absolutely, positively put it in writing.
-
Query the quality of customer
relationships.
-
Rate the efficacy of the
present management team (if any), as well as the pros and cons
of keeping the team in place after the transition.
-
Search for the right
opportunity. The right one isn't necessarily the first one that
crosses your desk.
-
Target your acquisition
objectives, such as price range, number of employees, market
share, profitability and location.
-
Understand that a business
acquisition takes time--especially to do the investigation
that's necessary. Expect it to take upward of three to six
months (and that's being aggressive)
-
Verify, verify, verify. Goes
hand-in-hand with "do your due diligence." Review the certified
financial statements, tax returns for at least the past three
years and "notes of indebtedness"--equipment leases, loans,
accounts payable, etc.
-
Weed out unscrupulous or
incompetent business brokers by asking for at least three
references and checking those references before allowing them to
represent you.
-
X out any advisors who do not
have the expertise you need and who seem to insist on blowing
your deal. Business acquisition can involve some tricky
arabesques; you want your advisory "net" to protect you from
gravely hurting yourself . . . or making such lopsided demands
that the seller will have no incentive to sell to you.
-
Yield to the preferred
sequence of events. Prospective purchasers may be eager to rush
into signing letters of intent or somehow "nailing down" the
seller to a commitment before doing adequate investigation. Yes,
you might lose an opportunity by taking the appropriate time to
follow the steps your advisors lay out for you. Stay optimistic;
this simply means it wasn't the right deal because the timing
wasn't right for you.
-
Zoom in on the relationships
that the business has with its vendors. Does it have different
classes of vendors (preferred, regular, occasional)?
There are plenty of advantages to
buying a business instead of starting one from scratch. Make the
most of them by learning your ABCs.
